Marketing Myopia and Innovation: Why the Retail Industry Will Continue to Change

The Impact of the Retail Industry

The retailing industry is the backbone of the American economy. From small family-owned stores to massive corporate chains, retail sales amount to over $4.5 trillion annually and represent two-thirds of the U.S. gross domestic product (GDP). The industry is such a critical part of the economy that the success or failure of retail companies is used to measure economic recovery, nationally (Farfan, 2014).

Competition in this megalithic industry is fierce and every year some players are forced to bow out. And yet, despite the intense rivalries and number of competitors, new companies enter the market challenging the status quo with new strategies and innovative ideas. This cycle of dying retailers and newcomers has caused the industry to change dramatically as a whole. How is it that new retailers can compete with, nonetheless, overpower the longstanding traditional players? After researching the theories of Michael Porter and learning from other business strategy gurus such as Theodore Levitt, Adrian Slywotzky, and Paul C. Judge, I am convinced that strategic positioning not only give companies the ability to dominate the market, but actually change an industry.

To illustrate this point, I will examine the success of three retailers who have helped reshape the industry. They are Walmart, Amazon, and Starbucks. The fact that these companies are overused examples of retail success only goes to show how powerful of a force they have been in the national, and even global economy. Each case will briefly demonstrate the strategies employed by these companies and then how the strategies have contributed to the radically changing landscape of retailing in America.

Older, more traditional retailers face intense competition from newer, innovative retailers such as Walmart and Amazon.com.

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A graphic displaying Walmart's activity systems as created by the author.

Walmart

In the 1960s major retailers, like Sears & Roebuck, Macy’s, Bloomingdale’s, and Montgomery Ward, among others, battled to be America’s most popular retailer. They tried to win the favor of American shoppers by investing millions in dazzling big-city stores, eye-catching newspaper advertisements, and glamorous TV spots. According to Slywotzky, the large retailers were blind to changes among consumers and the new opportunities these changes could create; they failed “to maintain intimate touch with the customer base” (1996, p. 67). Meanwhile, Sam Walton strategically placed Walmart away from the big cities. Using a low-cost strategy, Walmart quickly dominated small-town America. Operating outside of many major markets and avoiding direct competition with the major retailers, it took Walmart less than twenty years to become the country’s most profitable retailer. When Walmart finally entered markets like Philadelphia, New York, and Chicago, it had built a powerful supply chain that none of its competitors could rival. Continued use of a low-cost strategy made Walmart relevant in urban areas as it attracted lower-income households who were happy to get more for less and enjoy a higher standard of living.

Today, despite their best efforts, competitors such as K-Mart and Target cannot rival Walmart’s success. As a side note that further supports Porter’s theory, Target has fared much better than K-Mart because although it is arguably Walmart’s closest competitor, it has differentiated itself from Walmart. A partnership with Niemen Marcus, cleaner stores, faster checkout lines, and improved customer service have all helped Target to achieve a slightly more upscale image and thereby attracting more middle class consumers. Still, even Target cannot compete with Walmart’s profitability, thanks to the trade-offs Walmart created.

From the beginning, Walmart focused on cutting costs. This focus penetrated the entire organization from the home office to cashiers. Cutting costs, however, comes at a cost. Because of Walmart’s intense focus on cost reduction, the quality of products and customer service are lower. Walmart has sacrificed corporate image as many argue that Walmart’s treatment of suppliers and employees is unfair or even unethical. While Walmart’s operations behind the scenes (supply chain management) have been perfected, it is not uncommon for shoppers to encounter poorly stocked isles, have difficulty locating store personal, and wait in endless lines for checkout and customer service. Stores like Sears and Target have tried to mimic Walmart’s supply chain, but these stores also try to maintain a reputation for quality and customer care. As Porter says, companies cannot compete two-ways at once (Porter, 1998). And, as a result, they fail to match Walmart’s sales and profit.

Exhibit 1 (below) shows a map of Walmart’s activity systems and shows Walmart’s “strategic themes.” This figure is modeled after Porter’s activity maps as displayed in his Harvard Business Review article, “What is Strategy?” (1998).

An Amazon.com fulfillment center in Madrid, Spain. | Source

An Amazon.co.uk facility.

Amazon.com

It’s easy to lose count of the number of retailers Amazon.com (Amazon) has put out of business, or at the least contributed to their bankruptcy. Since its conception in 1994, Amazon has challenged almost every sector of the retailing industry. From books, to auto parts, to clothing, many consumers are turning to Amazon’s low prices, high range of products, and convenience. What make Amazon so successful? What differentiation strategies has Amazon.com employed that have beat out other dotcoms and leading brick-and-mortar chains?

To begin, how many companies intend to be unprofitable in their first four to five years of operation? While many dotcoms were “getting rich quick” and spending money on luxurious offices, Amazon invested in systems and processes that would allow it to dominate the market for years to come. They did not achieve profitability until their sixth year. One of the most critical investments was their website. Not only can Amazon.com handle incredible amounts of traffic, but it greets each customer by name and displays relevant products based on the customer’s search and purchase history. Amazon also invested in millions of square feet in warehouses, data centers, and customer service centers. During its peak day in 2012, Amazon was selling 306 items each second, for a total of 27 million items in one day (Yarow, 2012). Ecommerce competitors cannot rival the colossal infrastructure and the complex inventory and order processing systems it takes simple to handle volume of this nature.

Amazon has differentiated itself through partnerships. From tiny independent marketplace sellers to major retailers (competitors) like Target and Toys R’ Us, few companies, if any, have been able to create so many win-win relationships. Additionally, Amazon has differentiated itself in marketing communication, relying on search engine optimization, targeted online advertising, and word-of-mouth promotion, rather than the traditional mediums of print and TV advertisements.

Amazon has also appealed to new and unique customer segments. In his 1998 BusinessWeek article, Paul C. Judge contended that marketers needed to target technology buyers as an independent customer segment (Judge, 1998). By offering the right products (computers and electronics) in a comfortable modality (online shopping), Amazon led the rest of the retail industry in appealing to this newly established group of consumers.

From the very beginning, Amazon has been relentless in its dedication to meeting customer needs. While many traditional retailers have put their focus on a particular set of product offerings, Amazon strives to create a place where “customers can find and discover anything they might want to buy online.” This statement comes from the company’s mission which includes three major tenants: being the “Earth’s most customer centric company,” carrying an incredibly wide product selection, and offering the “lowest possible prices” (Amazon.com, 2014). This matches the advice given by Levitt in his 1960 article in the Harvard Business Review, that companies need to be customer-centered rather than product oriented (Levitt, 1960).

Like Walmart, Amazon’s business model and strategy come with trade-offs. The most obvious is that Amazon is 100% online. The company was designed around the Internet and unlike most other retailers, does not have to balance different sales modalities. Customers buying from Amazon will never be able to touch or feel the product before they buy and they will never interact face-to-face with a salesperson or customer service manager. Because of this, there are certain customer groups Amazon will never reach, namely, older consumers who are uncomfortable or unwilling to purchase goods online. Finally, there are many companies that would love to have Amazon’s infrastructure, but have shareholders who are unwilling to put forth the capital and sacrifice short-term profit for a long-term strategy.

A Starbucks Coffee location in a Japanese train station.

Starbucks

Starbucks is best known for its locations. How many companies would consider having four full-service locations within a tenth of a mile radius a good idea? Apparently Starbucks did and it has paid off. But Starbucks has achieved differentiation in other ways. They maintain good employee relations, which is a rarity in the retail industry, by offering competitive benefits which include health insurance for “partners” who work more than 20 hours per week (Groth & Lubin, 2011). Because of this, employees are more dedicated, knowledgeable, and service oriented. Finally, Starbucks is known for high quality. From the coffee beans, to the quick service, to comfortable store atmosphere (with free WIFI), Starbucks is known for their uncompromising commitment to the customer experience.

All of three of these strategies come with trade-offs that are hard for competitors to replicate. Starbucks has many locations, but they only specialize in one thing: coffee. Part of the reason Starbucks has been so successful while maintaining rapid expansion is their focus on a few categories of food and beverages. Many retailers want their employees to have great attitudes and strong service, but they are not willing to pay more than minimum wage and they skimp on benefits. While Starbucks provides high quality, they are not inexpensive. Many retailers get caught straddling quality and price and end up providing neither.

However, what I find most amazing about Starbucks is its ability to gain and retain consumers, even in difficult economic times. In his 1996 book titled, Value Migration, Adrian Slywotzky discusses how consumers’ real incomes were decreasing, people were working more leaving less time for shopping, and generally customers were becoming more focused on price (1996, p. 65). This sounds like bad news for the retailing industry. Although it was bad news for many retailers, others thrived in this new consumer created environment. Slywotzky continued to describe how superstores and specialty stores took the market by storm. Superstores appealed to consumers because of volume and selection. Specialty stores, on the other hand, attracted customers’ individual personalities. In addition to Slywotzky’s observations about consumer’s income and time, he also notes that customers were “placing greater value on their own sense of individuality…gravitating to stores and merchandise that had personality, flair, and a more distinctive image” (1996, pp. 65-66).

This helps to explain Starbuck’s success. During the past five years (2008-2013), an economic period that has been is one of the worst in U.S. history, Starbuck’s revenue has increased over $4 billion annually from $10.4 billion to $14.9 billion (Statistic Brain, 2012), their stock price has quadrupled, and they are continuing to open new locations (McGrath, 2013). Much of Starbucks success has come from their international growth during this period, but that cannot be the only answer. It is my belief that Starbuck’s flair, their corporate culture, and their meticulous effort to personalize the customer experience, such as offering 87,000 different drink combinations, has drawn customers by the millions.

Paving the Way

Even though straddling doesn’t work, many companies still try to do it. Just like celebrities set fashion trends, the practices of industry leaders are mimicked by other companies. For this reason the positioning strategies employed by Walmart, Amazon, Starbucks, and other strategically innovative companies have changed and continue to change an entire industry. Following Walmart’s example, more large retailers are investing backwards (vertically) in their supply chain. Thanks to Amazon, every major retailer participates in ecommerce. And because of Starbucks, retailers inside and outside of food service are putting a stronger focus on personalized service and the customer experience.

Walmart, Amazon, and Starbucks are not historical case studies. Because of their differentiation strategies and effort to meet customer (and future customer) needs these companies will continue to led and change the retailing world. Walmart is investing in new American manufactured products through its new initiative to bring jobs back to the U.S., Amazon is toying with the idea of using drones to deliver packages, and Starbucks is considering installing wireless charging pads in their stores while exploring more convenient ways customers can pay for their coffee. Innovation and technology are the conduits, strategy is the force, and the customers are the motivation that will guarantee the retail industry will never remain stagnant.

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